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21MB201 LM9
21MB201 LM9
21MB201 LM9
Marketing Channels
Marketing channels are the ways that goods and services are made available
for use by the consumers. All goods go through channels of distribution, and
marketing depends on the way goods are distributed. The route that the product takes
on its way from production to the consumer is important because a marketer must
decide which route or channel is best for his particular product.
Marketing Channels:
Channels create utility, improve exchange efficiency and help match supply
and demand. They bring suppliers and buyers together. Each channel system has a
different potential for creating sales and producing costs. The chosen channel will
significantly affect and be affected by the rest of the marketing mix. A channel’s
vertical dimension (length) is determined by the number of types of participants in
the channel. There are no intermediaries in the most direct channel (a zero-level
channel).
For example, Automative tyres. The industry’s output which is sold for OEM
is distributed direct from tyre factories to manufacturers. Tyres for replacement for
cars on the road are sold mainly through retailers. Some manufacturers have
different products that require separate distribution channels. Finally, some
manufacturers find it feasible to use different channels in different parts of the
country.
Trade Channels:
ii. For many smaller products, direct marketing may not be feasible
considering that exclusive retail outlets for small products may not work, and
having to stock other products might end up in having just another grocery or
food outlet which would not serve the purpose. Setting up exclusive retail
stores for marketing of small products like chocolates would not be a feasible
idea.
iii. Given the lower return on investments in the retail business, organisations
would be better off investing their money in their main business rather than
taking up retailing or other channel functions.
As such, the use of intermediaries is mainly to make the goods available and
accessible to target markets. Intermediaries, because of their specialisation,
experience, and scale of operations, are able to achieve more than what the
organisation can in terms of reaching to the target markets.
Marketing Channels – 9 Important Functions (With Channels Level)
A marketing channel mainly performs the task of moving goods from the
producers or manufacturers to the final users. The channel is instrumental in
overcoming the gaps between the producers and consumers in terms of time, place
and possession or ownership.
c. Negotiation – The channel members are the ones who negotiate with other
channel members and customers to facilitate the transfer of ownership.
e. Risk taking – The channel members assume the risk for carrying out the
channel work.
The Fig. 3.1 shows one major source of cost savings affected by using
intermediaries/ distributors. The Fig. 3.1 (a) depicts three producers, each using
direct marketing to reach three consumers. This system requires eight different
contacts. On the other hand we can see in Fig. 3.1 (b) three producers contacting
three consumers through one distributor. This requires six contacts. In this way we
can see that intermediaries reduce the work of the producers.
Channel Levels:
a. A zero level channel – As the name suggests, in this type of a channel, there
are no intermediaries or zero level of intermediaries. Here, the manufacturer
sells directly to the customer. This is also known as a direct marketing
channel. Examples of this type of channel include door-to-door sales, mail
order, telemarketing, TV selling, and manufacturer-owned stores.
b. One level channel – This type of a channel comprises of only one selling
intermediary such as a retailer.
c. Two level channel – This type of channel is mostly seen in the consumer
goods markets. Here, there are two intermediaries in between the
manufacturer and the final consumers; typically a wholesaler and a retailer.
e. More than three levels – In some cases, one can observe longer marketing
channels, that is, channels that have more than three intermediaries.
f. Channels used in consumer and industrial products – The producer and the
consumer are a part of every channel.
When deciding the length of the channel there are several factors that need to be
taken into consideration.
They are:
1. Size of the market – For a market that is large, use of indirect channels
proves to be more economical. More the spread of the market, more expensive
it becomes to serve the market directly.
2. Order lot size – If the average order lot size is smaller, transportation costs
increase. Here the indirect channel is more economical.
5. Type of the product – Depending upon the nature of the product, the length
of the channel needs to be decided. A product that is perishable in nature
would need a shorter channel.
1. Conventional Channel:
i. Direct Channels:
d. Factory outlets – small outlet just outside their factory- export factory
outlet.
Here, two intermediaries exist. This is the most popular choice and is used by
both small and big companies alike. This is ideal for consumer non-durables.
Example- Biscuits and chocolates, soaps, shampoos, Parle-g etc.
This is the longest indirect channel available to a firm. The agent middlemen
may be commission agents, export merchants who manage trade on behalf of the
manufacturer. Companies’ with multiple product portfolio and producing consumer
non-durables with national and international market resort to this channel.
Here, retailers do not exist. This works well for institutional consumers such
as colleges, hospitals, schools clubs, government agencies, business houses,
religious institutions etc. This can be adopted in case of consumer durables and
consumer non-durables.
2. Integrated Channels:
i. Vertical Channels:
a) Administered Channel:
b) Contractual Channel:
c) Corporate Channel:
Here, channel components are owned and operated by the same organisation.
Although it provides full control, this comes with a huge investment. An example of
a corporate vertical marketing system would be a company such as Apple, which
has its own retail stores as well as designing and creating the products to be sold in
those retail stores.
In managing the intermediaries, the firm must also decide on the emphasis
given to the ‘push’ versus ‘pull’ marketing strategy. A ‘push’ strategy uses the
manufacturer’s sales force, trade promotional money, or other means to induce
intermediaries to carry, promote, and sell the product to end-users.
Marketing activities directed towards the channel as part of ‘push’ strategy are more
effective when accompanied by a well-designed and well-executed ‘pull’ strategy
that activates consumer demand. On the other hand, without at least some consumer
interest, it can be very difficult to gain much channel acceptance and support.
In designing the marketing channel, the marketer must analyse customers’ desired
service output levels (lot size, waiting time, convenience, product variety, service
backup).
They should also establish channel objectives and constraints based on:
a. Product characteristics
Companies can choose from a wide variety of channels for reaching customers
– from sales forces to agents, distributors, dealers, direct mail, etc. Most companies
now use a mix of channels where each channel reaches a different segment of buyers
and delivers the right products to each at the least cost.
Number of Intermediaries:
(a) Exclusive distribution – Here the distributor has an exclusive relation with
the producer and is not allowed to keep competitors’ products and brands. It
is used when the producer wants to severely limit the number of intermediaries
and wants to maintain control over the service levels and outputs offered by
the resellers. For example, automobiles.
(b) Selective distribution – Here the distributors can keep products of very
few limited producers and generally of one category of products such as home
appliances. This strategy is used by established companies and by new
companies seeking distribution.
(c) Intensive distribution – This consists of the manufacturer placing the goods
or services in as many outlets as possible while the distributors are also
handling many competitors’ products and brands. Convenience goods such as
salt, sugar, cookies, etc., are good examples of products suitable for this type
of distribution.
For level of sales below X1 (as shown in the figure above) provider’s sales
agency will have economic advantage over their own sales force. But when
the level of sales increases above the level X1, the company’s sales force will
be more economical.
ii. Control and Adaptive Criteria – The channel alternatives are evaluated in
terms of companies having better control and more adaptable channels.
The following factors influence the design and selection of marketing channels:
2. Buyer behavior
3. Environment
4. Competition
5. Organization.
Usually, perishable products have a short channel. This does not mean that
perishables can be sold only in areas close to the place of production. Roses from
Kashmir fly to London every day, and milk from Haryana comes to Delhi in
refrigerated vans every day.
Goods that have a high unit price and a high margin are delivered directly by
the manufacturers. For instance, bulky industrial goods are moved directly by the
manufacturers. On the other hand, frequently used and ‘low margin’ items like
cigarettes have a long chain of middlemen before they reach the ultimate consumers.
Service support required by buyers may vary from product to product and
market to market. The services expected can be home delivery, availability of all
products under one roof, credit facilities, short lead-time, i.e. the time between
placing the order and receipt of the product, help during installation of the product,
and after-sales service.
The choice and design of a marketing channel have to take into account such
service requirements. The requirements of institutional buyers are very different
from individual buyers. That is why manufacturers of consumer durables, like fans
and refrigerators, use sales representatives for institutional buyers and a dealer
network for individual buyers. Earlier, fast food chains had emerged to suit the
changing life-styles of certain sections of people in society.
The two important lessons that this model teaches us are as follows:
i. Channel selection should be such that the search time gets reduced.
For making the cues stronger, the emphasis is usually on advertising through
the media. However, the choice of location for retail outlets, point of purchase
displays and advertisements can make the cues stronger. These are the situational
cues and are very effective for products bought on an impulse rather than as well-
thought out choices. In order to be heard inside a factory, one will have to shout
louder than the noise-level of the machines.
Factor # 3. Environment:
Many environmental factors such as technology, economy conditions and
government regulations affect the choice of distribution channels.
He can even see through his video monitor the size, shape, color, etc., of
products from different angles and then place an order. There is no need for currency
notes and coins in this method. Once the customer places an order with a store, his
bank account gets debited and the same amount gets credited to the stores’ account.
The Japanese have the ‘just in time’ inventory system by which they have cut down
tremendously on inventory holding.
Factor # 4. Competition:
Factor # 5. Organization:
If companies want better control, they can go for direct distribution. Big
companies like Brooke Bond and Bata have direct distribution facilities. But, in such
cases, problems such as the distribution staff forming unions, increase in the cost of
maintaining infrastructure, and wage rise, might hamper the organization. A small
organization may not be able to afford direct distribution, and it may be better to
give that job to some other big company or sole-selling agent.
On the other hand, there are small companies which cater to small regions,
like Ponvandu Soap, and prefer to have direct distribution to retail outlets for two
reasons – (i) their overheads will be less, and (ii) they can use direct distribution as
a strategic tool to get competitive advantage. In the case of a very small operator,
e.g., someone making and selling pickles, the person concerned will distribute the
product herself in order to avoid extra cost, and also do the job of the smart-talking
saleswoman.
After the basic design of the channel is determined, the firm faces the task of
effective channel management. Once the task of selecting dealers/firms to work with
is over, it has to motivate channel members through trade commissions, incentives
and supervision. It has to further periodically evaluate the performance of individual
channel members against their own past sales, the sales of other channel members,
and, possibly, sales targets.
Because markets and the marketing environment are continually changing, the
firm must be prepared to make channel revisions: individual members may be
dropped or added, channels in specific markets may be modified, and, sometimes,
the whole channel system may be redesigned.
Marketing Channels – For Consumer Goods, Industrial Goods and Services
(With Examples)
Consumer goods category includes huge array of products. Fast Moving Consumer
Goods (FMCG), consumer durables, convenient goods, etc. are included in this
category.
Channel length can vary from zero to n in case of consumer goods. Generally more
lengthy channels are observed for these products. Retailers are found only in
consumer goods channels. Consumer goods channels take many forms.
Examples:
For example, cosmetics, farm products like fresh fruits, vegetables, encyclopaedia,
many innovative products through home shopping, etc.
For products such as groceries, ready to eat and ready to cook food products, etc.
For example, Grahak Peth, Apana Bazar, etc.
For example, farm products like food grains, fruits, vegetables, etc.
Examples:
For example, industrial supply houses trading fairly standardized industrial goods
like lathe machine, grinding machines, electrical supplies, etc.
Producers of services also need to think about distributing, i.e., making their
services available to their customers. Thus the concept of marketing channels is not
restricted to the physical goods only. However, they are not concerned about
transportation, warehousing, inventory, etc. like the intermediaries for tangible
goods and thus have limited role. Marketing channels can make the services
“available” and “accessible” to the target customers.
In any case channel length does not exceed 1 level. Some big and reputed
service providers train the individuals to perform a service and franchise their
services, e.g., employment Agencies, Travel Agencies, etc.
After having selected the channel alternative, it is time for the organisation to
select individual channel members and motivate and evaluate them, and modify the
channel arrangements over a period of time to provide better service to the end users.
Channel Dynamics:
Distribution channels are also constantly evolving with time. They keep
changing with regards to their structures, functions, and their business arenas. Given
this, there is also a greater possibility of channel competition and conflict. We will
look at the changing channel dynamics with regards to the recent channel
developments like the Vertical, Horizontal and Multi-channel Marketing Systems.
Types of Channels:
i. Corporate,
iii. Contractual.
Gone are the days when organisations sold to a single target market through a single
channel. Given the complex nature of multiple segments that are tapped, multi-
channel marketing has become the order of the day. Multi-channel marketing occurs
when a single organisation uses two or more marketing channels to reach the same
or more than one market segment.
1. Channel Conflicts:
Vertical channel conflicts exist when there is conflict between different levels within
the same channel. For example, when automobile manufacturers try to enforce
policies on their dealers, it leads to a conflict.
Horizontal channel conflicts exist when there is conflict between the members at the
same level within the channel. An example of this type of conflict is one auto dealer
having a conflict with another auto dealer.
3. Multi-Channel Conflict:
i. Goal Incompatibility:
When there is a goal incompatibility issue between the manufacturer and the channel
member, it can give rise to a channel conflict. For example, if the manufacturers
prefer to have lower prices and larger volumes whereas the dealers want higher
prices and medium volumes, it can lead to a conflict.
A conflict may arise on account of unclear roles and rights. For example, if an
organisation sells to customers that are within the territory of the agents, this can
lead to a conflict.
Differences in perception about the market requirements and their responses may
lead to conflict. An example of differences in perception is when the manufacturer
is hoping for higher sales and expects the channel member to carry higher inventory,
while the channel member perceives the market conditions to be otherwise.